Constant Growth Stock Conceptual Overview: Explore how the value of a stock changes as a function of the discount interest rate. The blue stair-step line depicts the value of future stock dividends. The orange stair-step line depicts the present value of those future dividends discounted by rs for a stock with initial di dend Do S 1.15 and an antic pated growth rate of g 24%. Use the slider to change rs and observe the corresponding changes in the equilibrium price of the stock. f,-y: PID.-Do(1+g)-$1.15(1 +0.04) = 0.0% 0.04.. $29.90 _ r,78 2.5 2.0 1.5 1.0 0.5 0.0 10 15 20 Years rs=8 10 15 20 2. When rs increases from, say, 8 c. Not enough to determine whether it would be a good buy. A The slider for r. is limited to a minimum of 4.1% so that rs is always greater than g. Move the slider to the minimum and observe how the present value of the stock changes. Must rs be greater than g? a. No reason rs needs to be greater than g because the formula adjusts the value of the stock appropriately b. Yes, because if rs were not greater than g, then the graph would be too large to display easily c. Yes, because if rs-g, then the formula divides by zero, producing an infinite value. Select